Governance in Energy

Presented by Energy DPG

November 14th 2013

Contents

• Overview of Energy Sector

• Introduction

• Regulatory Framework

• Sector Progress

• Conclusion

OVERVIEW

• Energy is central in Tanzania’s growth – it is crosscutting and currently an expanding sector, and has a bigger role to play in enabling other sectors to flourish.

• Currently only 21% of the population has access to the electricity grid, mostly those who reside in urban areas.

• In past decade the national electrification status has slowly increased, from 10% in 2002 to the current 21% of the population.

INTRODUCTION

• Energy Sources - Biomass continues to dominate the total energy consumption Tanzania, at 90%, which is leading to accelerate environmental degradation.

• State of Electrification - annual electrification generation of 5,212GWh supplying 21% of the population

• For the past decade, the undersupply of electricity has been prominent with the increase in domestic energy demand (Figure 1: Population Growth & Grid Access),

Demand Forecast

• The demand for electricity has been rising at an exponential pace that TANESCO hasn’t been unable to keep up with.

• Population Growth - 2012 census report published by the National Bureau of Statistics shows that the Tanzanian population has tripled in the last 45 years, from 12.3 million to 44.9 million, with an annual growth rate of 2.9%.

• Urban centers have higher population growth rates, while the household size in rural areas is biggest — Dar es salaam has a highest annual population growth rate at 4.4 million, and Simiyu has the highest average household size at 6.9

Current Source of Electricity Generation

Energy Supply

• Tanzania’s electrification industry is centralized, with one monopoly in charge of electricity provision that is mostly hydro-dependent and supplemented by imports.

• The Tanzania Electric Supply Company (TANESCO) is a fully government owned and vertically integrated utility that is responsible for national electrification (Appendix 5: Electricity Capacity and Primary Sources), which includes generation, transmission and distribution (TANESCO, 2013a).

• TANESCO has an installed generation capacity of 1,509.85 MW (Msyani, 2013); of which 54% is derived from hydro4 and 46% is derived from natural gas — 13MW of the generated electricity is imported from Uganda and Zambia.

• The historical dependency on hydropower has been affected by the nature of climatic variation and seasonal change, reducing the availability of water resources for power production, which has now focused on thermal.

• The current reliance has also been problematic, since thermal generation under Emergency Power Production has not been able to cover the deficit caused by the lack of hydropower

Electricity Availability

• Electricity contributes less than 2% of the total energy use in Tanzania, but it’s impact on the economy is significant.

• In the short-term perspective, the financial viability of TANESCO is far from credible. TANESCO is operating with a deficit, and they have not been able to recover operational cost due to historical low tariffs and exorbitant power purchase agreements with Independent Power Producers.

• In the long term this will prevent much needed private sector investment in the sector, especially in electricity generation capacity..

REGULATORY FRAMEWORK

• Energy Development Strategies - , Tanzania Development Vision 2025, Power System Master Plan, Big Results Now

• Energy Policies – National Policy, Electricity Act 2008, Rural Energy Act 2005, Environmental Management Act 2004, PPP Act, Public Procurement Act 2011

• Electricity Tariff - tariff structure uses various currency and varies between off-grid and grid-connected projects. TANESCO proposed 90% tariff increase

• Energy Subsidies - EWURA should evaluate the structure of the FiT and recommend REFiT

Key Electricity Stakeholders

• Government of Tanzania – President's Office Planning Commission, Vice President’s Office, ministries, agencies, research and development institutions

• Development Partners Group — DPG was established in 2004, and includes 17 bilateral and 15multilateral

• Civil Societies – Local think tanks, NGOs, CBOs

• Private Sector – IPPs, SPPs, project developers, SMEs

Electricity Tariff Structure

• Domestic Low Usage Tariff (DI): 230V supply with consumption less than 50 kWh per month, is subsidized and includes services; Residential consumers, with the first 50kWh enjoying a lifeline subsidy

• General Usage Tariff (T1): 230V or 400V supply with consumption above 283kWh; Residential, small commercial, light industrial use, public lighting, billboards etc.

• Low Voltage Usage Tariff (T2): 400V supply with consumption above 7,500 kWh, but less than 500 KVA; Industrial consumers with monthly consumption greater than 7 500kWh and demand less than 500kVA

• High Voltage Usage Tariff (T3): consumers using 11kV and above. The average tariff is 12.6USc/kWh; Industrial consumers.

Institutional Obstacles

• Energy infrastructure investmentt — grid expansion and system rehabilitation

• RE requires a significant upfront cost to meet capital requirements. This includes the cost of feasibility studies and securing land for project development.

•  The effort by the Ministry to establish a clear subsidy structure

Financing Energy Development

• RE project development is complex — local banks and pension funds do not understand RE project finance and the process to obtain long tenors required to finance these projects

• Interest rates from local banks are too high for local private developers

• Currently local banking institutions are not well position for RE projects . Typically, bilateral and multilaterals must be approached as the most viable institutions prepared to take on the commercial and political risks associated with the financing of RE projects.

SECTOR PROGRESS

• Several private companies - SPPs have been operating, in addition to IPPs support grid expansion

• GoT implemented PPP arrangements for RE project developers, also funding from TEDAP under REF (managed by REA) - REA has implemented several projects (on-grid and off-grid)

• Tanzania Investment Corporation (TIC) was established to support private sector in RE investments — revised TIC website to help potential investors and streamline the investment process

Access to Modern Energy

• Main objective of the current 5 years development plan.

• Rural Lighting Initiatives - the Ministry and it’s Rural Energy Agency is working hard to increase rural electricity access through increased connection to the grid and decentralized renewable energy technologies through support to both on and off-grid connection (TEDAP)

• Overall the RE subsector lacks focus, with barriers preventing private sector participation in the development of the sector.

Renewable Energy Feed-in Tariff

• REFiTs are recalculated every year based on existing budget costs (adjusted from the Consumer Price Index for that year) and executed through a standardized contract (Power Purchase Agreement).

• Eligible projects (currently TANESCO and IPPs) with fulfilled technical requirements are restricted to have a minimum distribution capacity of 100 kW, and maximum export of 10MW depending on the connection voltage level.

• Differentiation of tariff structure is limited to SPP (grid-connected and mini-grid). There’s no retrofit based on generation technology, size, fuel-type or application, but the structure is highly dependent on the season (dry and wet) — 2012 average for grid-connected was 152.54 Tsh/kWh, while for the mini-grid was at 480.50 Tsh/kWh.

Connection Rate

• Steady increase in connections, and hence increased coverage of services reaching the population, at more than 1,032,000 electricity customers

• A clear definition of electricity access is needed, with emphasis on increased productive use of electricity to enhance economic growth.

CONCLUSION

• Proposed Energy Sector Indicators

1. TANESCO arrears and operating deficit - TANESCO improved collection rate by *20% ( *Negotiable)

2. Roadmap for sector reform - BRN: To be published by June 2014

3. Subsidy Policy - PAF: Policy approved by Oct 2014

• TANESCO’s power system development plan will increase supply to various regions with up to 3,262 MW through investment in energy infrastructure - some of the planned projects are behind schedule.

Moving Forward

• GoT should seek local funding (or from GBS) to develop solar and wind maps for the country to reduce up front costs of RE and support grid supply.

• MEM and EWURA should make the cost reflective tariff a priority in order to get TANESCO back on a firm financial footing.

• This should be done together with a subsidy program financed by the MoF as a transition to ensure that TANESCO can pay its bills going forward and provide comfort to potential investors to invest in the industry.

• Increase the role and awareness of TIC’s work — coordinate efforts among public and private RE stakeholders